The Companies Act, 2013 brought about a standard shift in the Indian Corporate environment by replacing the 58-year-old Companies Act, 1956. The purpose of replacing the Companies Act, 1956 was to enhance corporate governance, clarify regulations, strengthen the interests of minority investors, and develop an Act suited to the present business environment and foreign best practices.

Section 186 of Companies Act, 2013 deals with the provisions of loans and investments by a company. The Companies Act, 2013 has come with a change in the theory of “Loan and Investment by Company“. The new Act provides that inter-corporate investments are not to be made through more than two layers of investment companies. There was no such provision in the erstwhile Companies Act 1956.

The word ‘Investment’ in day to day discourse would involve any right or property in which capital or money is invested, like an investment of money in equity shares, mutual funds, debentures or other securities (except the making of loans or advances or any other financial transactions such as lease, purchase of receivables, or other credit facilities). An ‘Investment Company’ means a company whose principal business is the sale and purchase of shares, debentures, and other several types of securities.

Section 186 of the Companies Act, 2013 relates to “loan and investment by the company”. It provides for approval matrix, monetary threshold,, recordkeeping, exemption from compliances, r guarantee, security, restrictions for giving loans, or making an investment in another entity. The other relevant provisions are Rules made under Section 186 of the Act.

Legal Requirements Under Section 186

1. Approval of Board:
1. The approval of the Board is needed in all cases irrespective of the investment, amount of loan, guarantee, or security.
2. The approval of the Board shall be acquired by means of a unanimous resolution passed at a Board meeting with the permission of all the directors present at the meeting.
3. Resolution by circulation or resolution of the committee of directors is not enough.
2. Approval of the members by passing Special Resolution:
1. When the aggregate of the loan, guarantee, investment or security already made together with the loan, guarantee, investment or security proposed to be made exceeds the limit provided under section 186(2), prior approval by means of a special resolution is required.
2. Limit under section 186(2) is higher of –
   
1. Sixty percent of paid-up share capital, free reserves, and securities premium or
2. Hundred percent of free reserves and securities premium.
3. The contents of the Special resolution shall comprise the total amount up to which the Board is authorized to make loans, investment, guarantee or security.
4. No approval by way of special resolution is necessary, where –
1. The loan is provided by a company to its Wholly Owned Subsidiary or to joint venture company, or
2. The guarantee is provided or security is given by a company to its Wholly Owned Subsidiary or to a joint venture company.
3. Where the acquisition of securities of its wholly-owned subsidiary is made by a holding company, by means of subscription or otherwise.
3. Approval of public financial institution [PFI]:
1. The company shall acquire the prior approval of a public financial institution [PFI] from which it has taken a term loan.
2. Approval of public financial institution [PFI] is not necessary if –
1. The aggregate of loans, investments, guarantee, or security already made together with the loan, guarantee, investment or security proposed to be made does not exceed the limit provided.
2. There is no default in interest to PFI or repayment of loan installments in accordance with the terms and conditions of such term loan.
4. Rate of interest:
1. The rate of interest chargeable should be more than the prevailing yield of Government Security closest to the time period of the loan.
5. No subsisting default with respect to deposits:
1. A company that has defaulted payment of interest on deposits or in repayment of any deposits accepted by it shall not make any loan, investments, guarantee or security till such default is subsisting.
6. Disclosures in financial statements:
1. The company shall disclose to the members in the financial statement-
1. The complete particulars of any, investments made, loans are given, guarantee or security provided, and
2. The reason for which the guarantee or loan or security is proposed to be utilized by the recipient.

Exceptions under Section 186

Section 186 is not applicable to certain transactions. Hence, this Section would not apply to any guarantees or loans given by the following as under:

1. An insurance company or a banking company or a housing finance company for transactions made in the ordinary course of business.
2. A company framed with the sole intention of financing industrial enterprises or for giving infrastructure facilities.
3. An organization that purchases the rights of shares.
4. A company whose principal business is the acquisition of shares.
5. A registered non-banking finance company that particularly focuses on the acquisition of securities.
6. Unlisted companies are legally authorized by the Ministry or Department of the State or Central Government.
7. A government company that operates defense production.

Penal Provision under Section 186 

1. For Company:

Every company shall be liable to a penalty which shall be not less than 25,000/- rupees, which may extend to 5,00,000/- rupees.

2. For Officer:

Every officer who is in default shall be punishable with imprisonment for a term which may extend to 2 years and fine which shall be not less than 25,000/- rupees, which may extend to 1,00,000/- rupees.